Should the EU further harmonize tax systems between member countries?

Background and context

Tax harmonisation is one aspect of the drive to a Single Market within the EU, removing distortions to trade between its members, and has already made progress in some areas despite being subject to national veto in the Council of Ministers. As a customs union all imports from outside the EU pay the same tariff. Within the EU sales taxes (VAT) must be at least 15%, although individual countries are allowed lower tariffs for designated items (e.g. books and children’s clothes have zero VAT in Britain). In July 1999 duty free shopping was abolished for travellers within the EU. EU Finance ministers have a working group to combat "harmful tax competition", whereby particular states offer specific tax incentives to businesses which act effectively as anti-competitive subsidies. None of these measures are the subject of fierce debate within the EU today.More controversial are proposals to extend tax harmonisation into new areas, such as corporate tax rates and taxes on investments. These were first raised in late 1998 by the socialist finance ministers of France and Germany, who argued that states with low overall rates in these areas (e.g. Britain and Eire) were competing unfairly. Germany also wants a withholding tax levied on eurobonds held by its own citizens in other jurisdictions (principally Britain and Luxembourg) as a method of tax avoidance. Britain in particular has pledged to veto any harmonisation in these areas, which has prompted calls for such measures to be subject to majority voting instead. Most controversial of all would be moves to harmonise income tax levels within the EU, but these are not yet on any government or Commission agenda.

Argument #1

Yes

Trade within the single market. Tax competition is unfair, especially when it is used to lure business from one EU state to another, as Eire has successfully done in the last decade, and as Britain arguably has done since its accession into the EU, undermine the principle of a single market. Economically inefficiencies also result, with industries locating in areas in which they have no real competitive advantage and perhaps stifling the development of businesses which would have a more secure long term future in that area, especially given the short-term fluctuations common in taxation policy.

No

Governments within euro area have already given up two of the three main tools that they previously used to regulate their economy (control over their currency and inflation). The power to adjust taxes is now the only major means they have of stimulating or checking their national economy, giving up this power would risk economic disaster, especially given the one-policy-fits-all application of the euro to very different economies.States within the USA have different taxation policies within a single market, weakening claims that such competition weakens a single economic area.

Argument #2

Yes

Social Europe – Non-harmonised taxes mean tax competition, which will result in lower taxes everywhere as governments pander to business in an attempt to safeguard jobs. Countries such as France and Germany should not be forced to sacrifice their welfare states through such a process of beggar-my-neighbour competition. Ultimately all EU countries may be forced through a race to the bottom to have lower tax revenues than they need to secure the welfare spending their citizens would like.

No

The internal competitiveness of states within the EU is linked to the external competitiveness of the EU within the global economy. Harmonisation is likely to level rates up towards those of the highest taxing countries, driving industries and services abroad to non-EU states, and leading to lower prosperity and higher unemployment for all within the EU.

Argument #3

Yes

All countries stand to gain overall from tax harmonisation, although individual measures may be unpalatable. Britain’s financial sector may suffer from a withholding tax on cross-border investments, but will gain from standardised tax treatment of pensions across the EU.

No

Democratic accountability is threatened by tax harmonisation. Arguments over differing levels of taxation and spending are often the issues that decide elections. Removing this power from national governments and ceding it to Brussels weakens accountability and distances citizens from decisions that affect their lives and jobs very closely. Different peoples may value different sorts of state, choosing between “Scandinavian” and “Anglo-Saxon” extremes in terms of taxation, welfare spending and egalitarianism; such choices are legitimate and removing such choice is undemocratic.

Argument #4

Yes

Fears of the eurobond market being driven outside the EU are exaggerated, as the proposed withholding tax (1999 version) would only affect private investors within the EU, who make up a very small proportion of the overall market.

No

Imposing a withholding tax on the interest from eurobonds may drive footloose financial services outside the EU, as happened originally with the creation of the eurobond market. Switzerland would be the probable beneficiary of this, with the City of London and Luxembourg both losing many jobs as a result.

Argument #5

Yes

Tax evasion is rendered much easier by tax competition between states in a single market, allowing unscrupulous individuals and businesses to set up mazes of cross-border holding companies, shell companies, bank accounts, share holdings, proxy directorships, claims about value added during manufacture abroad, etc. Tax harmonisation would render the tax system much more transparent and thus make evasion much more difficult than at present.

No

Although people of different states may make conscious political choices about the level of taxation under which they wish to live (point 3), often the economic consequences of fiscal decisions are unclear in advance. Having relatively similar countries with different taxation systems allows clear comparison of the levels and approaches that work best to provide revenue and prosperity. Free market competition in economic policy will allow the best practice to come to the fore and be adopted elsewhere; harmonisation denies this possibility.

Argument #6

Yes

Environmental taxes (e.g. on fuel, energy, emissions, etc.) and pro-health taxes (e.g. on alcohol and tobacco) will only be effective within the single market if their levels are harmonised in the cause of the common good. Currently, governments’ attempts to meet their Kyoto targets and to improve the health of their citizens are undermined by cross-border tax competition. This is especially obvious near borders between EU countries, e.g. Northern Ireland and Eire petrol taxes, Britain and France petrol, tobacco and alcohol taxes.

No

Overall corporate tax burdens are actually higher in Britain and Eire than in France or Germany due to the greater number of allowances available in the latter two, supposedly “high-tax” states, which narrows the base upon which tax is levied considerably. This means tax harmonisation measures will have unpredictable effects which may not please those who advocate them most enthusiastically.